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Real estate

Staying the course

Economic fundamentals should continue to support real estate

Paul Guest, Lead Real Estate Strategist

Over the remainder of 2018, economic fundamentals should be supportive of further solid real estate performance. Transaction volumes will likely remain near long-term averages, rental growth should remain healthy, particularly in the prime segment, and as yet we do not expect a meaningful move outwards in yields.

Positive trends such as above-average consumer spending and business investment growth in Europe, fiscal stimulus in the US or an upswing in global trade are all worth noting.

But we also take note of the lingering fragilities, such as anemic consumer spending in Japan, growing credit risks amongst emerging markets, and slow wage growth in the developed economies.

The solid performance of real estate relies on supply remaining under control and this, of course, varies by market. But where supply growth has been strongest we have either seen or expect to see a downward adjustment in rents, e.g. Singapore or London office markets, or have seen very strong levels of demand growth that have compensated, e.g. in US multi-family residential or in global logistics.

Price gains are now concentrated in the logistics sector, in Europe, and in second-tier cities and countries. Looking ahead, we expect investors will continue to find it challenging to put money to work and expect another slight fall in transaction volumes in 2018.

Markets will eventually have to adjust to the shrinking risk premium. As interest rates slowly rise, investors will need to assess what is an appropriate risk premium for real estate by market and sector.

We expect the remainder of 2018 to be a continuation of the current relative calm. Investors should be reassured that slower appreciation was expected and the transition thus far has happened without market disruption.

Property values are increasing at about the pace of inflation, as the ultra-low interest rates and faster inbound flows of capital are no longer driving down cap rates. Appreciation in the market today relates back to the positive income generated by properties, as opposed to heated capital market conditions. The positive outlook for economic growth reinforces our view that income should continue to grow faster than inflation in 2018.